Time to leave NS&I?

Hundreds of thousands of people with NS&I savings accounts will see their rates slashed this week, so is it time for you to get shot of the state-owned savings bank?

NS&I announced that it was cutting rates for almost 590,000 account holders back in June, with the changes due to come into effect on September 12.

The rate on NS&I’s Direct ISA will plummet from an annual equivalent rate (AER) of 2.25% tax-free to 1.75% tax-free, while the Direct Saver rate will drop from 1.50% to 1.10% AER. The rate on NS&I Income Bonds, which are often popular with retired people looking to boost their income, will fall from 1.75% to 1.25% AER.

So is it worth sticking with NS&I, or should savers vote with their feet and move their cash elsewhere? We look at the available options...

Safety for savers?

One of the reasons NS&I has proved such a popular home for savers in recent years is that it is government-backed. This means it offers 100% security that account holders will get all their money back in the very unlikely event that NS&I collapses.

But as the vast majority of other savings providers protect savings of up to £85,000 per individual thanks to the Financial Services Compensation Scheme (FSCS), provided you don’t hold more than this amount with any one institution, your cash is safe anyway. According to the FSCS, 98% of the UK population have less than this amount in savings and are therefore covered by the protection limit.

Anyone lucky enough to have more than this amount in savings should check that their money isn’t held with the same institution, as two seemingly distinct providers might be owned by the same group. Read our article 'Who owns who? to find out which banks operate under the same licence.


Can you earn more interest elsewhere?

NS&I’s Direct ISA was one of the market leading cash ISAs before the rate was chopped. Now, the top-paying variable rate cash ISA is Nationwide Building Society’s Flexclusive ISA Issue 4, which pays an annual rate of 2.25% on a minimum investment of £1. However, you must have a FlexAccount with Nationwide to be eligible to open this account.

If you don’t want to have to transfer your current account to Nationwide, the building society also offers the Easy Saver ISA Issue 2 account, which pays 2.00% AER tax-free on a minimum investment of £1. Tesco Bank’s Instant Access Cash ISA similarly pays 2.00% on a minimum investment of £1.

However, none of these accounts accept transfers in from existing ISAs, so if you want to move money held in your NS&I Direct ISA elsewhere, Aldermore’s 60 Day Notice Cash ISA Issue 2 pays a higher rate of 2.10% on a minimum investment of £1,000 and accepts transfers in.  However, you will have to give at least 60 days’ notice if you want to make a withdrawal, otherwise you’ll lose the equivalent amount of interest on your savings.

Top easy access savings

If you’ve got savings in an NS&I Direct Saver account and are looking to move it elsewhere, there are a number of different accounts which pay higher rates of interest.

For example, Britannia’s Select Access Saver 3 account pays 1.75% AER if you’ve got £500 to invest, and this account can be opened by post, in branches or online. Bear in mind, however, that you can only make a maximum of four withdrawals a year from this account. If you make more than this, the rate drops to just 0.10% for the rest of the year.

Other options include Coventry Building Society’s Online Saver account which pays 1.60% AER on a minimum investment of £1 and BM Savings Online Reward account, which pays the same rate on a minimum investment of £1,000. Both of these accounts also restrict the number of withdrawals you can make a year to four. If you make more than this number with the Coventry account you’ll lose 50 days’ interest, while with the BM Savings account the rate drops to 0.50%.

If you need regular access to your money, then you could consider the Sainsbury’s Extra Saver account which you can open with £1 and which pays 1.30% AER. You can open this account by telephone or online and you can get your hands on your cash whenever you want without penalty.

Choices for Income Bond savers

If you’ve got NS&I Income Bonds and want to move your money when rates are cut to 1.25%, it could be worth considering a fixed rate bond. However, you will have to be prepared to lock up your cash for a while. Tesco Bank’s 5 Year Fixed Rate Saver account, for example, pays an AER of 2.95% on a minimum investment of £2,000. Remember though that you won’t be able to get access to your money at all during the five-year term of this account.

If you don’t want to tie up your cash for that long, then Britannia's one-year fixed rate bond pays 2.03% AER for 12 months on a minimum investment of £1,000. You will need to leave your funds untouched for the 12-month term.

Alternative savings options

As well as comparing savings accounts, it's also worth thinking about other ways to earn higher returns than those offered by the NS&I accounts. For example, peer-to-peer lending, where you lend to individuals and small businesses, can provide returns much higher than those offered by deposit accounts.

For example, Funding Circle enables you to lend from as little as £20, and offers an expected AER of 5.80% after fees and bad debt. This will vary depending on which businesses you choose to invest in. RateSetter’s Monthly Access account meanwhile, allows you to invest from £10 and pays a variable AER of 2.50%.

The biggest downside of peer-to-peer lending schemes is that they are not covered by the FSCS, so your money could be at risk in the event that something goes wrong. However, most of these schemes have funds in place which are designed to pay out to lenders in the event that any borrower fails to pay back their loans.

Don’t forget current accounts

Current accounts could also be an option for savers in search of decent returns as some of them pay higher rates of interest than many savings accounts do. For example, the Nationwide FlexDirect Current Account pays 5.00% AER on balances up to £2,500 for 12 months. You will need to pay in at least £1,000 a month and after 12 months, the rate falls to 1.00%.

Alternatively, the Santander 123 current account pays up to 3.00% AER on balances up to £20,000. You'll earn 1.00% on balances over £1,000, 2.00% on balances above £2,000, and 3.00% on balances between £3,000 and £20,000. You also get cashback of between 1.00% and 3.00% on household bills paid by direct debit out of your account. However, you must pay in £500 or more a month and there is a £2 monthly fee.

Alternatively, Halifax’s Reward Current Account offers a £100 switching incentive when you move your account across, as well as a £5 reward each month you pay in a minimum of £750 and pay out at least two direct debits. You'll also need to stay in credit.

From September 16, switching current accounts is set to get quicker and easier. Find out more with our 7-Day Switch hub.

Please note: Any rates or deals mentioned in this article were available at the time of writing. Click on a highlighted product and apply direct

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